Germany has lowered its growth forecast for 2016 in the face of an emerging market slowdown that is dampening exports, leaving domestic demand as the sole pillar of support for Europe's biggest economy this year.
Chancellor Angela Merkel's cabinet agreed its annual economic report on Wednesday in which it expects gross domestic product (GDP) to grow by 1.7 per cent, on a par with the 2015 performance, but below a previous forecast of 1.8 per cent.
The report underlined a fundamental shift in Germany's economy away from a reliance on exports and towards more domestic-driven growth as demand from China and other emerging markets has waned.
Berlin expects imports to rise at a faster rate than exports throughout 2016, meaning net foreign trade is likely to clip 0.4 percentage points off of economic growth.
This is a remarkable development for an economy that for decades has relied mainly on exports to countries around the globe, led by its engineering and auto sectors.
The shift leaves domestic demand as the sole propellant of growth this year. The government expects a rise in consumer spending by 1.9 per cent and spikes in construction investment by 2.3 per cent and of state spending by 3.5 per cent.
Rising real wages, rock-bottom interest rates and record-low car fuel costs due to the plunge in oil prices are giving a strong boost to consumer purchasing powers.
In addition, the state is spending billions of euros to accommodate and integrate a record influx of more than one million refugees and migrants.
"The German economy is in good shape," a cabinet statement said, adding the labour market remained solid and employment was expected to rise further, pushing up the tax take.
Berlin reiterated its goal to keep the federal budget balanced for the third consecutive year in 2016 despite the higher state spending on infrastructure and refugees.
Nonetheless, Economy Minister Sigmar Gabriel said he was dissatisfied with the expected growth rate, saying Germany needed to speed up digitisation and improve its research and development programs.
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